Economic Regulation and New Technology in the Telecommunications Industry

By Miller, Edythe S. | Journal of Economic Issues, September 1996 | Go to article overview

Economic Regulation and New Technology in the Telecommunications Industry


Miller, Edythe S., Journal of Economic Issues


Among the most difficult public issues facing industrialized nations today are questions of how rapidly new telecommunications technology should be adopted and the implications of this for economic regulation. The new technologies hold the promise of a vast expansion of human capabilities and major improvements in well-being. Popular publications today are replete with references to a near future in which advances such as interactive video health care and distance learning, movies on demand, and telecommuting, banking, and shopping will be norms of daily living. However, extensive implementation of many of these technologies involves the costly construction of a new network that, in many scenarios, contemplates the replacement of functional infrastructure. Much of the debate centers on questions of whether we should spend what is estimated as upwards of $200 billion to rip out existing phone lines and replace them with broadband fiber capable of transmission of multiple services and on questions of the appropriate distribution of associated benefits, risks, and expenses of such an undertaking. Turbulence in the telecommunications industry sufficient to gamer a continuous stream of newspaper headlines [for example, Cauley 1995, B7; Pearl 1995, A3; Mills 1995, 20] turns such seemingly arcane issues into matters of practical urgency.

A major rationale of the assault on regulation that has taken place in the work of orthodox economists over the past several decades, and in the courts and legislatures since the late 1970s, is the view that regulation retards technological advance and that an "optimal" rate of investment in new technology will be a happy by-product of deregulation. To be sure, the adverse view of regulation is more generally grounded in the overall perspective of orthodox economics that favors free markets and limited government and dismisses economic power as a pervasive real-world phenomenon. Moreover, even when the existence of economic power is acknowledged, orthodox economics condemns most attempts to restrain it as ineffective and mischievous. In an easy leap of logic, then, it holds regulatory restraints responsible for many of the ills that beset society, including slow rates of innovation and technological progress. In contrast, institutional economics apprehends market power as a persistent phenomenon of economic life and perceives its control as imperative. This clash of visions is in large measure responsible for conflicts about the need for social control and the link between economic regulation and technological change.

In this paper, I attempt to explore these differences, particularly in reference to telecommunications, partly because when it comes to traditional public utilities the process of deregulation and "regulatory reform" is furthest along in this sector. It is also arguable that the development of orthodox theoretical and programmatic tools for use in "imperfect" markets is most advanced in telecommunications. There is little question, moreover, that a technological transformation currently is occurring in telecommunications, so that the issue of regulatory impact on technological progress is of particular interest.

I begin with a brief discussion of the general neoclassical case against economic regulation(1) so as to provide fuller context. I then consider in greater detail the relationship of the mainstream view of economic regulation to its perspective on technological development and technology deployment in telecommunications. I conclude the paper by suggesting that technological progress is neither inhibited nor encouraged by regulation, or any institutional design, but rather by the human proclivity for inquiry, and that economic power is not a function of the level of technological advance. I argue that control of market power is essential to ensure optimal social results.

Regulation: Death from a Thousand Cuts

The details of the campaign against regulation are familiar. …

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Economic Regulation and New Technology in the Telecommunications Industry
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